Double Whammy: Low Financial Literacy Plus Little Guaranteed Income

By Latoya Scott

March 3, 2017

Americans are uniquely imperiled when it comes to retirement security, new research suggests. No other developed nation couples such low financial literacy scores with such low guaranteed retirement income.

This is the chief conclusion in a recent report from the National Endowment for Financial Education, which examined data from the Program for International Student Assessment and George Washington University.

In the U.S., Social Security covers 45% of a typical worker’s final pay, the report found. That compares to 89% in Spain and 80% in Italy. All three have disappointing financial literacy scores. Yet with such generous pensions, retirees in Spain and Italy have nowhere near the urgency as those in the U.S.

It isn’t clear that pension benefits will remain so robust in Europe, which faces many of the same challenges the U.S. faces—namely a population living so long it was busting the pension system. So Spain and Italy may one day be in a similar predicament. But for now their need is less urgent.

The lack of guaranteed retirement income is reaching crisis levels in the U.S., and the shortfall largely flows from the shift from defined-benefit pensions to defined-contribution retirement plans. Individuals in the U.S. must save and plan on their own. This creates urgency around financial education.

“Young Americans have to finance 30-year retirements with 40-year careers, and the math just doesn’t add up unless they have the financial intelligence to meet the shortfall with accumulated assets,” NEFE President Ted Beck states in the report.

So, what needs to happen? “What we need are stronger mandates for personal finance education,” Bill Hensley, director of education at NEFE, says in the report. He says we need to improve teacher preparedness and promote a coherent set of national standards for personal finance in middle and high schools.

Other nations with low financial literacy scores have already taken such action. In the U.S., only 17 states require high school students to take a personal finance course, according to the Council for Economic Education.

Financial education must begin early and it must include programs both at school and at home, according to the report. With more and stronger programs, more students will enter adulthood—and ultimately retirement—with financial confidence.